2013-01-06

Saving for Retirement in Canada

First, a note for the Baby Boomers

I'm a younger guy, and this is directed
at the near-retirement age people: you guys have been very lucky and
many of you don't realize it. Your working years have coincided with
the greatest bull market in human history driven by demographics and
the rise of the American empire. The 1980-2000 period, or
1980-present when you include bonds, is historically unprecedented.
The rise in stocks/bonds was incredible, and you were lucky to have
your income earning years feed cashflow in the middle of the bull
market.

I find that many older people fail to
acknowledge the role of this well timed, historically unique bull
market. And they draw some wrong conclusions, such as “I am a
great investor” and “I will see similar returns if I
stick to my methods”. Well if the bull market ends, no you
won't. And if that historically unique bull market didn't happen
during your working years, you would be in a very different position
today.

It's all about expectations

Another consequence is the expectation
that Baby Boomers have for investments as a whole, and for their
children. Boomers think to themselves, everything will keep rising
at 7% to 10% a year in perpetuity. So they make promises to others
based on this. They think their children can live the grand
retirement life they did, if they invest similarly (I personally
doubt it).

And then there's pension fund managers
and investment advisors. Younger people are lead to believe that
government & corporate pensions will still exist because these
amazing returns will continue forever. In reality, I think those
returns are gone. Many corporate pensions will be exposed as bankrupt
the moment someone is willing to revise the expectation of returns
going forward... most forecasts are still done with these 7% to 10%
figures! It's now a decade of poor returns, yet people stick to those
outlandish projections!

I'm rambling a bit, but to sum up my
thoughts on this:

1. In my generation, I think very few
people will be able to save anything close to a $1 million (in
today's dollars). The Boomers could do it only because they got the
greatest bull market in history, and should be thankful for that
timing.

2. If you have a pension, that's great. But realize
that some pensions will vaporize because they are based on
now-obsolete returns and wildly outlandish projections. Do not expect
that your children will have any pension at all.

3. If you're
near retirement, I caution you about expecting anything like 10%
returns going forward. I think that's extremely optimistic, and even
Buffett writes this in his 2007 Berkshire letter. GDP is growing at
around 2% and there's a mountain of debt in both USA and Canada.
Personally my projection for stock/bond returns going forward is more
like 2% to 5%

4. Real estate has been a huge part of
Canadian "wealth accumulation". There's no point to building
equity in your home unless home prices are rising rapidly... it's just
a leveraged investment. So just like in America, there has been a false
expectation of wealth-growing based on a housing bubble. Many of us
think Canadian RE is a bubble, and if this ends, it's going to take a
lot of this supposed "wealth" away. So beware of that risk too.